Difference - combination of twocompanies to form a newcompany - the purchase of onecompany by another with no new companybeing formed
Number of M&As deals in 2010 3% 2% Outbound - 55 deals Inbound - 30 deals Domestic - 95% 1713 deals Adopted from ChinaVenture.com.cn
Value of M&As in 2010 36% Outbound61% Inbound Domestic 3% Adopted from ChinaVenture.com.cn
Outbound mergers• Outbound deals exceeded the size of the average merger• China carries the most outbound M&As in such sectors as Energy, Mining, Manufacturing and IT. Reasons: The desire to expand abroad Acquisition of rights to high-technology to move in the production chain The need to acquire raw inputs and diversify foreign exchange reserves Acquisition of reputable brandsFor further notes refer to the slide 19
Dumping – dubious reason for combination? Dumping – selling on a foreign market at a low price, below the fair price in order to: • Dispose of temporary surplus • Achieve monopoly by eliminating competitors • Solar panels U.S. has imposed • Steel Cylindersanti-dumping duty • Silicon Metalon China regarding • Diamond Sawblades • Warmwater Shrimp products such as: • Fresh Garlic
Inbound mergers• Countries that carried the biggest M&As in Chinese market in 2010: Japan, France, Denmark• The biggest domestic M&As were in Shanghai - 13% in terms of number of deals and 20% in terms of value• The inbound deals dominated in sectors: Manufacturing, Food & Beverage, Logistics and Healthcare. The amount of healthcare deals accounted for over 50% of all inbound M&As. Reasons: Low labor costs Well-established distribution network Growing economy Enter a new market
Restrictions • PRC’s law states that companies in China are not allowed to engage in ‘all lawful activities’. • Not all industry sectors are open to foreign investors. The industry sectors are classified as • Encouraged • Permitted • Restricted • ProhibitedFor further notes refer to the slide 20
Prohibited • Postal services • Gambling • Arms and ammunition manufacturing • Publication of books, magazines, and newspaper Restricted – strict scrutiny• Banking and Insurance Encouraged / Permitted Industries • Mining• Tobacco • Manufacturing• certain textiles • Transportation• Electricity, gas and water • High-technology production• Mining of precious metal• Golf courses
M&As in China have different forms: Acquisition or merger of : Privately- Foreign- State-owned Listed owned invested enterprises companies enterprises enterprisesFor further notes refer to the slide 21 and 22
Merger versus Acquisition • Acquisition • Merger Equity Acquisition Merger by ‘absorption’ Asset Acquisition Merger by new establishment For further notes refer to the slide 23
M&As in West (UK) and China West -> UK China1. Main means of obtaining Contractual offer Direct acquisition – stockcontrol of a public company Scheme of arrangement exchange, tender offer, transfers by agreement Indirect acquisition2. Disclosure requirements 3% of target issues shares 5% of target issued share3. Break fees Prohibited In certain deals break fees are provided4. Hostile bids Common. Approximately Rare. Tradable and non- 16% of all the bids tradable shares. No rights to sell the whole 100% of non- tradable shares.5. Minority shareholders Shareholders have to sell A bidder cannot compulsory<10% the rest of their shares purchase the shares of remaining minority shareholders6. Stamp duty 0.5% of the transfer price 0.1% of the transfer priceFor further notes refer to the slide 24
The Importance of Guanxi Tight monetary policies Liquidity implemented NO GUANXI problems by the authorities Buyer: Difficulties in paying its purchases Seller: No pressure for the debt payment, further credit extension GUANXIFor further notes refer to the slide 25
the buyer is expected toWhenever the seller provides purchase more its buying Guanxihu with from the seller commercial credit, according to the reciprocity principle of Guanxi
Why do takeovers fail??? International community knows very little about Chinese companies – people afraid of the unknown Managers’ Inexperience in dealing with international markets Little transparency – Chinese companies operate two sets of books Failure to plan for post acquisition period Absence of Guanxi – no connections Cultural differences
Failure – example Shanghai Automative Industry Corporation (SAIC)’s acquisition of Korean funded Ssangyong Motor in 2005. After five years of SAIC assigned hard work and Chinese managers countless negotiations and $500 million to Ssangyong and they had difficultyrestructuring, SAIC ultimately had to investment with the tradedeclare bankruptcy union.
Outbound mergersReasons for outbound transactions: The need to acquire raw inputs and diversify foreign exchange reserves• SOEs buy miners and Oil & Gas production and exploration firms in order to keep Chinese economy supplied with input of raw materials Desire to expand abroad• Most often privately-owned companies expand abroad to benefit by increasing a market share, often by ‘dumping’ – setting prices below the fair market price. Acquiring well-know brands and rights to the high-technology• Reputable brands give a head start in a new market.
RestrictionsForeign investors have to be in compliance with all the laws and regulations of the PRC – even Iflocal Chinese companies are not. Foreign investors are the number one target of legal andfinancial control mechanisms in China. Before the Chinese authorities check local companies’compliance issues, they will check the foreign investor.
M&As in China have different formsa) Acquisition or merger of privately-owned enterprisesForeign investors who acquire a privately held company will need to convert it to a Foreign Invested Enterprise(FIE). As a result, all related FIE rules and regulation have to be observed. These includes restrictions relating tothe available investment vehicle, the necessary qualifications of investors, the possible scope of business, andthe minimum registered capital.Where the ratio of a foreign investors’ capital contribution to the registered capital of the FIE established as aresult of M&A is less than 25%, the enterprise shall not be entitled to the treatment for FIEs.All M&A between a foreign and domestic enterprise should determine the transaction price on the basis of theresult of an evaluation conducted by an asset evaluation institution. The institution must be established withinthe territory of China in accordance with the law.b) Acquisition or merger of foreign-invested enterprisesParties involved in transaction of FIE equity are free to arrive at a transaction price themselves, with noregulations or requirements.The most important thing to realize is that the transfer of equity interests in FIEs, even between two foreigninvestors, requires state verification and approval.
M&As in China have different formsc) Acquisition of stated-owned enterprises (SOEs)According to the provisions, foreign investors who invest in SOEs or acquire stated-owned equity interest shall:• Have the business qualifications and technical ability as required for the operation of the target• Have a good business reputation and management capabilities• Have a solid financial position and economic strengthsRegulations state that an appraisal of the acquisition object, be it property rights of a target SOE or state-owned equity interests or assets, must be conducted by a competent state-owned appraisal authorityd) Acquisition of listed companiesChinese law makes a legal distinction between listed and unlisted shares, of which listed shares are divided intothree categories, namely A-shares, B-shares and shares listed overseas.A-shares – traditionally reserved for Chinese businesses or individuals, however foreign investors may purchaseup to 10% of A-shares provided they qualify as a Qualified Institutional Investors.B-shares – are RMB-denominated shares and can only be purchased and traded for in foreign currency and aretraditionally reserved for foreign entities or individuals. However, the number of B-shares compared to A-shares in a listed company is quite small, and in most cases, companies have not issued B-shares at all.The unlisted share can be purchased by either an agreement between the purchaser and the targetshareholders or by a tender offer.
Merger versus AcquisitionUnder Chinese law mergers are only possible as onshore transactions. Therefore foreign investors must haveset up FIE in China in order to be able to complete a merger deal.There are two types of mergers:• Merger by ‘absorption’ – the absorption of one company by another whereby one company is dissolved and its registered capital and assets are merged into the remaining entity. The legal entity of the absorbed business would then cease to exit.• Merger by new establishment – each of the companies in question are dissolved and a new legal entity is formed by combining the assets and registered capital of the old companies
M&As in West (UK) and China1. China• Indirect acquisition – achieved by purchase of a controlling interest in the parent or controlling shareholder of a listed company. On completion the target is converted into a foreign-invested enterprise, which then controls the listed subsidiary below the target.UK• Contractual Offer to all of the target company’s shareholders to acquire their shares. For the contractual offer to succeed a bidder must secure acceptances in respect of more than 50% of the target company’s share capital.• Scheme of arrangement – statutory mechanism involving a shareholder vote and court approval3. Break Fee Supposedly used to recoup costs and fees associated with due diligence during an acquisition. These break fees are seemingly used more and more for the purpose of restoring lost reputations arising from deals falling through. Common in lease agreements, these break fees are penalties charged against parties not wishing to fulfill their portion of a contract.4. Hostile BidsA specific type of takeover bid that is presented directly to the target firms shareholders because the targetsmanagement is not in favor of the deal.If takeover is hostile – shares are going to have to be bought.
The Importance of Guanxi• Guanxi – express the relationship of one person to another, or one party to another. This boils down to exchanging favors, which are expected to be done regularly and voluntarily.• Guanxihu – a new term derived from guanxi; ‘specially connected firms’“The other side of credit-granting, the intensity of accounts receivable for the seller, is also tightly associatedwith guanxi. Whenever the seller provide its buying guanxihu with commercial credit, which is today of utmostimportance to buying firms in China, the buyer is expected to purchase more from the seller according to thereciprocity principle of guanxi. This marketing and efficiency effect precisely corroborates Amblers (1994) pointthat guanxi constitutes the most effective (sales growth) and efficient (low costs) promption tool in the Chinesebusiness environment. Moreover, guanxi-based credit extension has a fairly lower bad-debt risk than non-guanxi-based credit granting since the buyer has to pay the purchase upon its selling guanxihus request inorder to maintain its mianzi in the business society and beyond”. Luo Y., Guanxi and Performance of foreign-invested enterprises in China; Management International Review; vol. 37; 1997; page 51-70